Screwing Up Our Bankruptcy World — Again? (Arbitration Petition at U.S. Supreme Court)

By: Donald L. Swanson

The U.S. Supreme Court has a history of screwing-up our bankruptcy world.

Examples go back to the 1982 debacle called Northern Pipeline v. Marathon Pipe Line, where the Supreme Court came within one vote (one vote!) of declaring the entire Bankruptcy Code unconstitutional.

A more recent example, Stern v. Marshall in 2011, created havoc by casting doubt on bankruptcy court authority.

Now is the Time to Be Afraid—Again

And now, we have reason to fear another screwing-up of our bankruptcy world:

–A bankruptcy arbitration question is presented in a “Petition for a Writ of Certiorari” to the U.S. Supreme Court [Fn. 1].

–Here’s Why

If the history of Supreme Court opinions on arbitration holds true, the Supreme Court will assure that arbitration becomes a much-bigger factor in resolving bankruptcy disputes than arbitration already is.

I have always maintained—and continue to do so—that arbitration is bad for “core” bankruptcy issues [Fn. 2]. Here’s why:

Bankruptcy establishes an efficient system for immediate action on pressing issues in business cases, where the viability and existence of a business is often at stake — arbitration would impair that efficiency;

Bankruptcy provides an efficient system for discharging individual debtors who, when faced with a discharge objection in bankruptcy court and no funds for a defense, can at least defend themselves pro se; and

Arbitration in bankruptcy is the ultimate forum-shopping tool—

To stall and create litigation leverage; and

To gain deep-pocket advantages over cash-strapped opponents (and there are lots of those in bankruptcy).

Here’s the basis for deep-pocket advantage in arbitration:

–Administrative costs of court systems are paid by taxpayers; while arbitrations receive no corresponding subsidy—the parties pay all costs.

Illustrative Hypotheticals

Here are four hypotheticals of “core” bankruptcy issues and how arbitration demands might be manipulative.

Hypothetical # 1.

IMG_0417
Checking cattle in Nebraska (Photo by Justin Swanson)

Chapter 11 debtor is a cow/calf enterprise in middle Nebraska (too much debt to qualify for Chapter 12). Cattle have daily needs for feed and water, salt and trace mineral products, and veterinary services. And fence maintenance is needed to keep public roads cattle-free. These are life-and-death and health-preservation needs—with urgency.

A lender provided high-interest loans to debtor, shortly before bankruptcy, and obtained a blanket lien on all assets: the lien is junior to other liens and is out-of-the-money. The loan agreement provides for arbitration.

Debtor files first-day motions for approval of DIP financing, use of cash collateral, sale of excess cattle and equipment, payment of employee wages, etc.

Lender, to get traction and leverage, files a motion to compel arbitration of all first-day motions (and every subsequent motion) having anything to do with its claimed collateral.

Will the lender’s motion be granted?

Hypothetical #2.

Chapter 7 debtor is a low-wage earner down on luck.

A lender provided high-interest loans to debtor, shortly before bankruptcy. The loan agreement contains boiler-plate representations on debtor’s financial condition and an arbitration provision.

Lender files a motion for authority to pursue nondischargeability against debtor in arbitration, based on false representations in the boiler-plate language. Lender knows debtor can’t afford arbitration costs.

Can lender require arbitration here?

Hypothetical # 3.

Chapter 11 debtor is a trucking business.

A secured creditor has an arbitration provision and moves for relief from stay for lack of adequate protection, including failure to maintain insurance coverage on rolling stock collateral.

Debtor files a motion to pursue objection to the stay motion in arbitration for the sole—and undisclosed—purpose of buying time.

Can debtor enforce arbitration in this context?

Hypothetical # 4.

Chapter 11 debtor has broad support from creditors for a plan of reorganization.

But an unhappy creditor, with arbitration provision in-hand, files a motion to compel arbitration of its objection to confirmation.  The creditor’s undisclosed purpose is to cause disruption and gain leverage.

Will creditor prevail on this motion?

Hypotheticals in Summary.

Each of these four hypotheticals deals with a “core” issue.

As a practical matter, each of the hypothetical arbitration motions should be denied: each is an abuse of the system, is for an improper purpose, and screws up the bankruptcy process.

And here’s guessing that bankruptcy courts would deny each of the hypothetical arbitration motions, if they have discretion to do so.

But as a legal reality, Supreme Court history suggests that it might grant these hypothetical motions. Such a result would be unfortunate!

Hope/Fantasy

Here’s hoping the Supreme Court can find a way to do what it’s never done before:

–i.e., find Congressional intent for an exception to arbitration requirements established in the Federal Arbitration Act.

–Getting There

Here’s how the Supreme Court might find such an intention in bankruptcy contexts.

  1.  Constitution.  For starters, bankruptcy is a singular area of law, because of its stature in Art. I, Sec. 8(4), of U.S. Constitution, which says:

“Congress shall have Power . . . To establish . . . uniform Laws on the subject of Bankruptcies.”

   2.  Uniformity.  In Central Virginia Community College v. Katz, 546 U.S. 356 (2006), the Supreme Court focuses on the Constitution’s “Bankruptcies” clause—and particularly its directive that Congress create “uniform” bankruptcy laws.  In Katz’s Footnote 13, the Supreme Court says this:

—The Constitution’s “mandate” to enact “uniform” bankruptcy laws requires “uniformity in treatment of state and private creditors . . . throughout the United States.”

So, how can bankruptcy laws be “uniform,” if parties can contract for arbitration on “core” matters, with the arbitrator’s ruling subject, on appeal, to a mere rubber-stamp standard of review?  The answer is this:  “They can’t.”

   3.  Existing Statute.  When Congress passed the Federal Arbitration Act in 1925, the Bankruptcy Act of 1898 was in already effect, which already contained this arbitration provision:

 “§ 26. Arbitration of Controversies. – (a) The trustee may, pursuant to the direction of the court, submit to arbitration any controversy arising in the settlement of the estate.”

  4.  “Core” Matters.  When the Supreme Court placed limitations on bankruptcy court authority in Northern Pipeline, Congress responded in 1984 with a list of “core” matters that bankruptcy courts could decide on their own.  Fed.R.Bankr.P. 9019(c) was already in place, in 1984, which reads (emphasis added):

“(c) ARBITRATION. On stipulation of the parties to any controversy affecting the estate the court may authorize the matter to be submitted to final and binding arbitration.”

   5.  Congressional Intent.  So, Congress intended its list of “core” matters to be handled by bankruptcy courts (not by arbitration, except at bankruptcy court discretion) as a means of assuring the “uniformity” of bankruptcy laws mandated by the U.S. Constitution.

Okay. Okay. I know. That’s fantasy . . . but we can hope!

–A More Realistic Hope?

A more realistic hope, perhaps, is that the Supreme Court will deny certiorari in the Anderson case and allow bankruptcy and appellate courts latitude to further develop this area of law—and at least create a significant circuit split—before the Supreme Court weighs in?

—The Best Hope

The best hope (which is probably fanciful, too) is that Congress will act to explicitly except “core” bankruptcy matters from arbitration requirements—and place such arbitration possibilities at the discretion of the bankruptcy courts.

Conclusion

Hopefully, the Supreme Court will find a way to provide practical help on arbitration in bankruptcy—instead of screwing up our bankruptcy world, once again.  Or, better yet, Congress will step in to fix the problem—we can always hope!

Footnotes

Footnote 1. The Petition is in Credit One Bank, N.A. v. Anderson, Supreme Court Case No. 17-1652. The question is:

Whether an arbitration agreement can be enforced in a dispute over an alleged violation of the bankruptcy discharge injunction.

It is scheduled by the Supreme Court for “Conference” on September 24, 2018.

Footnote 2. 28 U.S.C. 157(b)(2) creates a list of “core” disputes:

“(2) Core proceedings include, but are not limited to—(A) matters concerning the administration of the estate; (B) allowance or disallowance of claims . . . or exemptions . . . ; (C) counterclaims by the estate against persons filing claims against the estate; (D) orders in respect to obtaining credit; (E) orders to turn over property of the estate; (F) proceedings to determine, avoid, or recover preferences; (G) motions to terminate, annul, or modify the automatic stay; (H) proceedings to determine, avoid, or recover fraudulent conveyances; (I) determinations as to the dischargeability of particular debts; (J) objections to discharges; (K) determinations of the validity, extent, or priority of liens; (L) confirmations of plans; (M) orders approving the use or lease of property, including the use of cash collateral; (N) orders approving the sale of property . . . ; (O) other proceedings affecting the liquidation of the assets of the estate . . . ; and (P) . . . matters under chapter 15 of title 11.”

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

 

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